The Weekend That Changed Wall Street

with the news that Tim Geithner had called a major-league powwow for later that evening, and the principals of the big firms were heading down to the Federal Reserve.
Not everyone knew the exact reason for the summons, but when Geithner called, they responded. The head of the New York Federal Reserve had that power.
“Tell me what’s happening,” I said to one of my sources. He laughed. “Let’s put it this way,” he said. “The call from Geithner wasn’t a request. He didn’t say ‘Would you mind coming down?’ It was more like an order.”
“Is it about Lehman?” I asked.
“I think so,” he replied. “I think they’re going to try and get a pound of flesh from us.” He said he expected Geithner and Paulson to pressure the firms to ante up some hard cash to save Lehman.
Moments later, I was back on air, fielding a series of commentators, lining up for an anticipated weekend bloodbath around Lehman Brothers. By now it had become somewhat commonplace to wait for the weekend meetings to get news before the opening of the Asian markets on Sunday. This weekend felt the same, but it was actually more significant. “The world changed very quickly and caught the U.S. financial system off guard,” Mohamed El-Erian told me, adding, “When we look back we’re going to say, ‘Wow! That was a period when the U.S. financial system was redefined.’”
With Lehman shares at rock bottom as we neared the close, everyone was speculating about what price Lehman might command, and whether there were any viable suitors. There was broad agreement that Lehman was not too big to fail. “They have their hat in their hand at this point,” said David Kelly of JPMorgan. Harvard University professor Martin Feldstein agreed that Lehman was no Bear Stearns and probably did not warrant a government backstop. “There is no reason why the shareholders or, indeed, the creditors of Lehman should be protected if in fact there isn’t enough capital there for Lehman to be viable,” he said. Feldstein was joining a growing chorus of financial experts who believed the system had reached a dangerous tipping point of too much government involvement, brought about by an overleveraged system. But there was still debate about whether the firm would, in fact, be forced to declare bankruptcy.
Jerry Webman, chief economist at Oppenheimer Funds, voiced deep concern. “This is a sea change in the financial world,” he said on my show that day. “For twenty-five years we’ve had an economy based on financial leverage—earnings based on the ability to borrow and put borrowing on top of borrowing, easy money driving these economies, driving earnings forward. What we’re trying to do right now is sort out who’s got a good long-term earnings model from solid business and whose balance sheet is potentially a lot of air.”
Most people I spoke with said to me, “Maria, this is different. This is unbelievable. This is the worst thing I’ve ever seen.” And it wasn’t just the specter of a bunch of wealthy Wall Streeters being toppled. Unlike Bear Stearns, where stock in the company was mostly held by the top executives, Lehman had a trickle-down ownership culture, with the lower rungs of the company, such as executive assistants, paid in stock. If Lehman fell, there would be a lot of average people left with nothing.
As the business day drew to a close, CNBC showed scenes of Lehman employees leaving the building, saying that they didn’t know if they would be back Monday. There were many tear-streaked faces outside Lehman headquarters in Times Square that day. Even so, few people, including the principals, believed Lehman would go down. For those on the outside, it was simply inconceivable.
The three men on the hot seat this weekend—Tim Geithner, Hank Paulson, and Chris Cox—were by no means a cookie-cutter team of financial types. That is to say, these were bright and very different men who shared one big commonality: the desire to get something important accomplished, popularity be damned. There are few times in life when one’s actions may create history, and they all knew that this was one of them.
New York Fed president Tim Geithner took a lot of ribbing for his youthfulness. The first time people met the slender forty-seven-year-old, they often remarked that he looked too green to bear such a large responsibility. The word most often used to describe him was “boyish.” But Geithner’s résumé was impressive. Born in New York City, the second-generation offspring of German immigrants, Geithner spent most of his childhood living abroad and graduated from Dartmouth with a degree in Asian studies.
One thing that distinguished Geithner was that he wasn’t a product of Wall Street. His rabbi was former Treasury secretary Robert Rubin, who years earlier told me, “Geithner will one day be Treasury secretary.” When he was tapped for the Fed position in 2003, Geithner was working at the Council on Foreign Relations, and, indeed, he’d spent his entire career in government and quasi-government positions. He didn’t come from the culture of the Street, where success was often measured in sizable bonuses and fat stock portfolios. He and his wife and two children lived in a modest house in Westchester County and were not regulars on the New York social scene. (Later, when Geithner was named Treasury secretary by Barack Obama, he had a tough time selling his house, even after he’d slashed the price to under $1 million. He eventually rented it while he waited for the real estate market to turn around.)
Geithner’s low-key, no-drama style was well suited to his position. But no one ever accused Geithner of being a pushover.
In a crisis, Geithner made a good partner for Paulson, who was known to be emotional and passionate. In office just under two years, Paulson brought almost a religious fervor to his job; he felt he was there for a purpose.
Unlike Geithner, Paulson was the epitome of a Wall Street man. Before President Bush nominated him for the Treasury,